(February 23) – U.S. Federal Reserve Board chair Alan Greenspan is wrapping up his Humphrey-Hawkins testimony before the Senate Banking Committee today, with markets intently focused on his comments.
Greenspan’s prepared remarks essentially repeated his comments last week, indicating that the miracle continues, but the Fed is worried. He touched on Fed whipping boys: tight labour markets, the stock market wealth effect, and the possibility of future interest rate rises.
“With foreign economies strengthening and labor markets already tight, how the current wealth effect is finally contained will determine whether the extraordinary expansion that it has helped foster can slow to a sustainable pace, without destabilizing the economy in the process,” he noted.
Again he hinted that the Fed is poised to raise rates. “As the FOMC indicated after its last meeting, the risks still seem to be weighted on the side of building inflation pressures.”
Stocks initially jittered downward as he spoke, but have been trending upward as he deftly fields questions from the assembled senators. Asked to rate the threat of inflation spiralling up to six or seven percent on a scale of one to 10, one being least, Greenspan responded, “Can I go below one?” He noted that inflation is very well contained at this point, and that if the Fed does its job it will remain that way.
Greenspan echoed long-time critic economist Lawrence Kudlow when he allowed that the Fed is not as important as it once was in determining the future direction of the economy, and that the market is swinging the heavier club. He also noted that while the U.S. economy is clearly in the midst of a technological revolution, he no longer believes the Industrial Revolution offers an analogy of how markets and policymakers should behave. Greenspan admits that the Internet revolution is unique and demands novel policy initiatives. This uncertainty is keeping the Fed on edge.
The testimony continues.
– IE Staff